As an example of how hard it will be for the greater pay TV industry to change look no further than Verizon's (NYSE:VZ) current spat with Disney's (NYSE:DIS) ESPN network. Last week, Verizon responded to continued consumer demand for a leaner, cheaper pay TV bundle with base channels and up to seven additional "channel packs" that are content related: sports, news and info, and pop culture, among others are the genre-specific packs Verizon seeks to offer.
Very quickly thereafter, Disney responded through a spokesperson [emphasis added]:
Media reports about Verizon's new contemplated bundles describe packages that would not be authorized by our existing agreements. Among other issues, our contracts clearly provide that neither ESPN nor ESPN2 may be distributed in a separate sports package.
And therein lies the rub: Even if cable and pay TV providers want to provide consumers with lower-cost options, networks and content providers still have significant sway in the process and could potentially prevent any substantive progress.
ESPN is a huge player
For potential cord-cutters, live sports is a powerful moat against taking the plunge. While TV shows and dramas can be purchased later through a host of outlets (Apple's iTunes and Amazon Instant Video, among others), live sports content loses its value to most fans as the game ends. And while other networks have jumped headfirst into streaming delivery, ESPN has mostly held off on going straight-to-consumer via a streaming-media solution.
That's probably because the current business model is very good for ESPN. TV research firm SNL Kagan estimates ESPN costs a subscriber $6.04 per month in affiliate fees, regardless of whether they watch the channel or not. But that's the problem with this negotiation, Disney and Verizon mostly determine whether you should pay for ESPN -- you don't.
A sports channel that is not to be included in a sports package
For starters, I don't blame ESPN for driving a hard bargain. To be fair, it has to pay for the cost of content and the NFL, MLB, NBA, and college sports are only becoming increasingly more expensive. In a world where $100 million contracts are becoming increasingly commonplace, the sports leagues need to depend upon both broadcast revenues and ticket sales to pay these salaries. SNL Kagan estimates the cost of sports licensing will increase at 7.3% per year over the next five years.
That said, it seems rather unfair for Disney to seek to limit choice in a relationship between the provider and subscriber. According to Disney's last annual report, ESPN is in roughly 95 million homes -- or roughly 95% of the U.S. pay TV market. Disney wants for Verizon not to offer this new and exciting product because its growth could potentially lower the amount of homes the network would be in ... by letting consumers choose what channels they want to pay for. In the end, Disney seeks to be a sports channel that doesn't want to be included in a pay-TV package.
Last year, Disney shocked observers when it allowed ESPN to be included on Dish Network's Sling TV. More recently, however, it seems as if content providers had subscriber limits in place to prevent the service from becoming too big. If Disney relents and lets Verizon include its channels in this bundle arrangement, it wouldn't be far-fetched to imagine subscriber limitations from happening here. In the end, it seems less like pay-TV providers will be less of a barrier against consumer choice and more like networks will be.